OFT's value-based pricing scheme is well-founded, but could increase overall NHS drug spend



Research News from Health Economics


A report by the Office of Fair Trading has recommended that pricing of drugs is based not on how much the drug costs to develop, but on the benefit that the drug can bring. After examining the proposals for a paper publishing today in the journal Health Economics, Professor Karl Claxton believes that such Value-Based Payments (VBP) make sense. He is, however, worried that the current plan is overly generous toward pharmaceutical companies and could lead to a rise in the NHS's total drug bill.

In most markets consumers are used to the idea of paying a high price for goods that give a lot of benefit, and a low price for those that perform less well. The consumer is unconcerned about the cost to the company for developing the item. Up until now, this has not been the case for the drug industry. Here prices have been set by the pharmaceutical price regulation scheme (PPRS) which tries to balance the cost to the NHS and profits for the pharmaceutical industry. In effect a lot of the calculation is based on the costs of development and production costs.

Under the new scheme the NHS will only take on technologies if they are cost-effective that means the health benefits of using the technology must be greater than health displaced elsewhere in the NHS (due to the additional cost of the technology), says Professor Claxton, who works in the Department of Economics and Related Studies and Centre for Health Economics at the University of York. This, he believes, will provide a powerful incentive for companies to concentrate on cost-effective delivery when they develop new therapies.

Such a radical shake-up is bound to worry people within the industry, but Claxton believes that most fears are unfounded. Some industry observers, for example, are worried that the result will simply be less revenue for their products. But Claxton believes that while some individual products may earn companies less, the overall spend will either remain fairly constant or could increase. An increase in overall costs would, however, worry the Treasury.

Claxton's proposal is that there should be an agreement to monitor total NHS spend, and link this monitoring to a rebate agreement in which any underspend created by the new system is shared by the industry. Equally, higher than expected spend would lead to a transfer from industry to the NHS. "This would reassure the Treasury and Department of Health that " says Claxton."The OFT report provides a clear and coherent rationale for a move to VBP"

"The OFT has put down an important marker which will inevitably shape the scope of future policy debates about value, guidance, price and innovation," says Claxton.

Editor

York University?  Isn't that the hot-bed of diminutive ideas where the celebrated Professor Alan Maynard works?  Of course, it is.

Just as Maynard has no clue as to hard GPs actually work or even how they work, so his colleague, Claxton, seems to have little insight into how the pharmaceutical industry functions or, for that matter, the NHS or the real world.

First of all, the price of drugs.  As the professor says, this is decided between the NHS civil servants on the Prescription Price Regulation Scheme and industry representatives.  If the civil servants are not up to their jobs and agree too high a price then the government's remedy is to replace them.  In other words, sack them.   The system works and does not need replacing.

Claxton's somewhat slipshod thinking continues by saying that consumers are not troubled about the cost of developing a product just whether it works.   A visit to his local Computer World will quickly demonstrate to him that the price is very much controlled by the cost of development in the early days of marketing a product and, just as with drugs, the cost diminishes as those costs are recouped.   An example is the DVD recorder/player, once extremely expensive now selling for a few pounds.

Items which cost less to develop generally cost less whether they work better or not.

Claxton then continues with this standard of debate by stating that "the NHS will only take on technologies if they are cost-effective".    That takes us into the sluggish, inefficient, bureaucratic, political world of NICE whose decisions about the usefulness of a drug largely depends on whether the NHS is prepared to pay for it.  NICE is often beaten to the post by other parts of the United Kingdom.

Good heavens, by the time NICE has got around to making a decision a high proportion of patients who could have been successfully treated by a particular drug, especially an anti-cancer drug, will be dead.

Rather naively, Professor Claxton believes his system will "provide a powerful incentive for companies to concentrate on cost-effective delivery when they deliver new therapies".   What it will do is to give them another reason for taking their R & D away from this country.  Just to make that more certain, Claxton has another wheeze up his sleeve.

He wants a system to measure the NHS spend on drugs in which the drug industry bears the burden of any underspend by the NHS and the NHS should also benefit from any over-spend by ensuring that industry picks up that bill, too. " This would" he says "Reassure both the Treasury and the Health Department".

I bet it would!

Has the good professor contemplated the disastrous effect on the national economy of the departure of the pharmaceutical industry from these shores?

No, I thought not yet who, some years ago, would have thought that Britain would lose its iron and steel industry, its motor industry, its textile industry and many others large-scale industries?   Yet they all moved abroad.   Were the governments of the day advised by similar shallow thinkers?   Do today's advisers believe that the pharma industry will not follow them?   Professor Claxton's item gives all the impression of that being so.

He should bear in mind that India, China, Japan and a number of Central American or Caribbean countries have thriving pharma industries just waiting to snap up British pharma or for that pharma to move R & D and production over there.   After all, they are all multi-national companies.

Think again, Professor Claxton.  Your scheme is a non-runner.

David Roberts